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Transfer Pricing (TP): HMRC instigate criminal investigations and ask companies: Did you lie to me?

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The Financial Times recently reported how HMRC have instigated criminal investigations into a small percentage of large businesses.  This is highly unusual given that HMRC have historically taken the view that even where a company and HMRC have different opinions on TP arrangements, they are “honest” disagreements and are usually resolved through TP adjustments and the company agreeing to pay the additional corporation tax.

HMRC’s stated position is that they will now consider opening criminal investigations where there is dishonesty.  Simon York, director of HMRC’s Fraud Investigation Service has publicly stated that there are “live investigations involving some very large corporates where individuals within those companies have lied to us in the context of a discussion”.

The importance of ensuring Transfer pricing documentation is up to date

For those Groups within the TP rules this should highlight the importance of ensuring TP documentation is up to date and includes a FUNCTIONAL ANALYSIS that sets out what each Group company does and the value it contributes (or in TP language: the functions, risks and assets employed by each entity). This must reflect what actually happens in practice.  During a TP enquiry the Tax Authorities may ask to speak to a variety of employees across the business in order to test that what’s documented is what actually occurs day to day in the business.

Should your policies be revised?

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Given the current pandemic, multinational groups should consider whether they have changed the way they operate since COVID 19 struck.  Should any transfer pricing policies be revised?

As we come out of the pandemic we can expect to see more enquiries/audits given that it is such a popular area of challenge for Tax Authorities around the world. Groups should expect Tax Authority challenge where they have not reviewed their TP policies or updated their documentation.

Groups should also remember that TP is not just a compliance matter. TP can be legitimately used to manage tax liabilities across international jurisdictions and helps you to identify the true performance of group companies. Policies should cover the full range of inter-company transactions including sales of goods and services, intellectual property and royalties, management charges, loans and intra-group financing.

At Menzies our team of specialists provide a range of Transfer Pricing services recognising that one size does not fit all.  We can work with you to:

  • perform a functional analysis to understand your business, identify relevant transactions and the economic substance of those transactions.
  • assist with an economic analysis and benchmarking study to provide you with meaningful contemporary pricing levels for the range of transactions you may undertake.
  • prepare relevant documentation needed for compliance with local country rules.
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